From the creation of the savings bank model by a Dumfriesshire minister in 1810 to the current day success of local, community-minded credit unions, Scotland has long been recognised as a champion of inclusive and ethical finance.

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Sustainable finance, also known as ethical, responsible or green finance, is the process of investing in accordance with certain values, affording ethical, environmental, social and governance criteria the same weight as financial returns.

Traditionally the mainstay of businesses’ corporate social responsibility (CSR) programmes and philanthropic gestures, the buzzword “sustainability” is a key post-crisis development in the commercial banking sector, and the virtues of sustainable forms of finance are now frequently extolled by financial heavyweights like Michael Bloomberg and Blackrock’s Larry Fink as central to maintaining the integrity of the financial system.

Caroline Barr is senior associate at CMS

According to last year’s Ethical Consumer Markets Report, the combined total value of the UK’s ethical banking, credit unions, ethical investments and share issue markets have almost doubled from £21.9 billion to £39.3 billion in 2016.

Engaging with themes of sustainability is also beneficial from a PR perspective, as RBS found when it announced its divestment from fossil fuels earlier this year.

Earlier this summer, Holyrood relaunched the Scottish National Performance Framework to align the overarching approach to government with the UNSDGs for the first time.

In parallel with the relaunch, the advisory group tasked with the establishment of the Scottish National Development Bank, which is charged with providing the capital required to meet the Government’s targets, has been keen to emphasise a focus on “mission-led, patient long-term investment” with the objective of furthering sustainable and inclusive economic growth.

Scotland’s private sector is also active in the field, with investment houses such as Kames Capital and Aberdeen Standard Investments recognised for their lengthy contribution to the ethical capital markets through their capabilities in managing “sin-stock” screened ethical funds. Scottish investment houses are also leading in terms of innovation.

Edinburgh-based Baillie Gifford’s Positive Change Fund, established in 2017, invests exclusively in companies that have a demonstrable positive impact on society, reflecting the growing appetite of retail investors to invest in companies that are seen as a force for good. Crucially, the enterprises in which the fund invests must intend to make a positive change; it cannot be incidental to their business model.

The fund’s integrity is further bolstered by the application of a “three factor impact analysis” to its activities, which is conducted independent of the investment process by a member of the firm’s CSR team. In a further example of local innovation in the sector, earlier this year Aberdeen Standard Investment partnered with Big Issue Invest to launch a ground-breaking fund that will invest in UK companies promoting and implementing good employment opportunities.

The partners have stated that the intention of the fund is to underpin the UNSDG on full and productive employment and to help address inequality across the UK, through financing companies paying above average wages, located in deprived areas and offering training opportunities for young people. In addition, a percentage of the fund manager’s fee will go to The Big Issue Group to support their ongoing projects in the fields of employment, well-being and social inclusion.

These funds are just two examples of numerous initiatives driven by Scottish enterprises in response to growing demand for proactive private sector contribution to solving large social and environmental issues.

In another key development, there is evidence of a significant uptick in third sector organisations engaging with businesses. A key example of this is Social Investment Scotland (SIS) seeking FCA authorisation as a regulated fund manager to raise finance for a venture capital fund, designed to acquire stakes in “mission driven” businesses. The establishment of the fund marks a significant shift for SIS, which has traditionally been restricted to investments in asset-locked social enterprises. This is an interesting development for the Scottish social finance sector, potentially signalling a departure from traditional non-profit structures in favour of a more commercial approach.

Omar Shaikh, CEO of Scottish Government-backed Ethical Finance Hub, has articulated Scotland’s credentials within the international market as a jurisdiction with the right “ecosystem” for the development and of sustainable and ethical finance initiatives. Those credentials include having a robust financial services sector, a positive and enabling regulatory framework, leading academic institutions and, crucially, a growing movement of people committed to seeing “things socially aligned and systematically stable.”

Mr Shaikh’s views clearly enjoy the support of the international community as evidenced by an upcoming summit in Edinburgh, which will see 300 ethical finance industry leaders gather in the capital, including representatives from the UN Development Programme.

The event in late October will launch the “Edinburgh Declaration,” a pioneering joint venture between the conference hosts, the UK Islamic Finance Council and the Church of Scotland, to create an ethical finance solution open to all in society regardless of religion, race or ethnicity. As the home of Reverend Henry Duncan, whose savings bank model forms the blueprint for modern Islamic finance, Scotland is a fitting location for the declaration.

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Scotland’s rise as a centre for sustainable finance and the opportunities it creates is well-timed, coinciding as it does with the economic unknowns facing post-Brexit Britain.

With a commitment across the public and private sector to build an inclusive and socially responsible economy, the expectation is that the next chapter of Scotland’s long banking tradition will see it establish itself as a global leader in the field of sustainable finance and set an inspiring example for others to follow.